Washington - On its surface, a much-watched case being argued today before the Supreme Court raises the simple question of whether banks may sell the tax-deferred products known a,.; annuities.

But banking and insurance executives say much more is at stake in the case, known as NationsBank v. Valic.

Banking advocates believe an adverse ruling by the nation's high court could choke off a promising source of fee income, or at least impose costly new regulations. The court could even strike at regulators' ability to expand bank powers, a move that could severely crimp the industry's growth.

Insurance underwriters, meanwhile, worry that the Supreme Court could strip annuities of the tax-deferred status that has made the products such an attractive vehicle for retirement savings.

"I don't view this as a battle over a bank insurance powers," said David Roderer, a lawyer representing 10 banking trade groups. "It is much broader."

The case stems rom 1990 ruling y the Office of the Comptroller of the Currency that authorized NationsBank of North Carolina, the lead unit of NationsBank Corp., to sell annuities. The Comptroller ruled hat annuities.The Comptroller ruled hat annuities resemble securities, financial instruments hat banks an buy and sell for their customers.

Variable Annuity Life Insurance Co., as Valic is formally known, swiftly challenged the regulatory decision. The Houston-based company, which sells annuities nationwide, argued hat annuities e insurance products because they involve the pooling of risk.

In August 1993, the U.S. Court of Appeals for the Fifth Circuit agreed with Valic, and ruled hat annuities ales re subject to a provision of the National Bank Act that limits banks to selling insurance only in towns of under 5,000 residents.

The Justice Department promptly appealed on behalf of the Comptroller's office, setting the stage for today's high-court showdown.

Annuities are clearly emerging s an important product for banks. Bank sales of the products are expected to reach $14 billion this year, or 19% of the $75 billion sold nationwide, according to Cerulli Associates, Boston.

In exchange for an up-front investment, annuity buyers receive a steady stream of income, typically upon retirement.

Any court decision that restricts bank's ability to sell new products should worry the industry, said Allen W. Croessmann,managing director of retail marketing and investment services at Bank of Boston.

"Banks want to be in a position to offer the products and services a customer want," Mr. Croessmann said. "To not be able to do that would be very disappointing,and it is safe to assume hat customers would start to look elsewhere."

The banking industry fears the justices will use this case to rule that the National Bank Act does not allow banks to sell insurance.

That could spell financial trouble for an industry that is eager o boost fee income, said Mr. Roderer, whose clients include the Independent Bankers Association of American and the Savings and Community Bankers of America.

"IF the court s restrictive,the vale of a bank franchise ill be seriously reduced," Mr. Roderer said.

"That's a view the Comptroller's office share, agency general counsel Julie Williams said.

"It would worry me if the court adopted a very restrictive interpretation of the National Bank Act," Ms. Williams said. "The vitality of national banking and service to customers would be jeopardized."

Without the ability to sell new products, the banking industry could fossilize, she said, forcing banks to stick to products that customers don't want.

A particularly harsh decision would force the agency to retreat from decisions expanding other bank powers, Ms. Williams said. Rulings at risk include an agency decision last week that eventually could allow bank subsidiaries to underwrite securities.

If the court doesn't go that far, banks still have plenty to worry about. The justices could force banks to sell annuities in immensely inefficient ways, banking advocate said.

"What is at stake is the ability of banks to sell a products directly and not go through duplicative procedures." Mr. Roderer said.

While banks could still use the National Bank Act's small-town exemption to sell insurance throughout their networks from a single small-town location, Mr. Roderer said the loophole as its limitations.

"The problem is, annuities cannot really be sold over the phone," Mr. Roderer said. "You really need to be face to face."

Insurance underwriters argue hat banks, if they win, won't have to worry about where they sell the product because annuities will cease to exist.

If the high court were to find that annuities are investments and not insurance, Congress could strip e tax deferral that has been such a boon to sales, said Gary E. Hughes, general counsel to the American Council of Life Insurers. And that, he said, would cost annuities their competitive edge.

But Mr. Roderer said annuities risk losing their tax-exempt status, no matter how the court rules, because the federal government is always looking for new revenue sources. "It may strengthen the Internal Revenue Service's view," Mr. Roderer said.

Each side sees considerable upside for the other in the Valic case.

If the court rules against the banking industry, insurers would e able to make up some of their lost market share, said Martin Rasmussen, vice president for products an new business development at Norwest Corp.

"We would have to revert back to just certificates of deposit or mutual funds," Mr. Rasmussen said. "The problem is that in the Midwest, investors are too conservative for mutual funds" and would turn to insurers for annuities instead.

But Mr. Hughes dismissed predictions of a banking disaster. He said banks will find ways around any limitations that are imposed For instance, he said, banks will continue to draw fee income from annuity sales conducted by unaffiliated, third-party vendors that lease space in bank lobbies.

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